Like many Internet marketers, it took Jerry West losing 40% of his affiliate commissions to suddenly realize that there are some big legal issues facing online marketing. This is known as cleaning up a mess after the fact rather than taking reasonable steps to avoid the problem in the first place.
For an overview of the affiliate tax mess, check out:
Internet Taxes Threaten Your Online Business (May 2008)
Internet Taxes: State Governments Want You to Become Their Tax Collector (May 2009)
Special Report: The Future of Affiliate Marketing (June 2009 PDF file)
After consulting with his lawyer and accountant, Jerry claims that he has found the “Amazon Affiliate Tax Solution.” Although this might be the solution for Jerry (and I’m certainly not going to offer legal advice in this blog post), his solution is a horrible idea for many affiliate marketers because it exposes them to additional taxes and even potential personal liability.
Although you can watch his video at the link above, Jerry’s affiliate marketing solution in a nutshell involves setting up a foreign corporation in a state where you do not live that doesn’t have Internet affiliate taxes (Nevada was used as an example) and hiring a virtual office “for about $200 per month” to field all your affiliate mail and transfer incoming phone calls directly to you in the state where you live and actually run your business operations. You run the rest of your business using a second corporation based in your home state.
The main flaws in Jerry’s solution were pointed out by me last year in a special report “Scam Artists and Your Business” (PDF file).
Here are some of the key dangers created by the scheme:
(1) Affiliate program operaters can still be required to collect affiliate taxes because the out-of-state company is essentially a sham or alter ego of your in-state company. At best, you’re engaging in unethical conduct. At worst, you’re engaging in fraud. Want to explain explain as an affiliate or as a defendant in a lawsuit the scheme and claim you were only acting unethically rather than illegally? Who do you think affiliate program operators will go after when they get stuck with tax bills because of your conduct?
(2) State governments where both of your corporations are based can argue that Company 1 should be registered to do business in State 2 (where you don’t live) and Company 2 should be registered to do business in State 1 (where you do live). Think of the joys of paying franchise and income taxes in two states for two companies, both in the state where each company is incorporated and in the other state as a foreign entity.
(3) The failure to observe corporate formalities can lead to personal liability because the corporate shield gets pierced. Going to run separate bank accounts for two businesses in two states? Not going to commingle the funds, are you? How about meetings of directors and shareholders? Corporate resolutions? Like to travel alot? How about paying for lawyers and accountants in two states to handle the mess of paperwork?
Unfortunately, people want a quick fix for their problems. If that’s what you’re looking for, Jerry West offers it with additional risks to your ethics, your business, and your personal assets…plus you’ll always be wondering if either a state department of revenue or your affiliate program operators will catch you.
What’s the best solution until the courts sort out the affiliate tax?
Move your online business operations to a state that doesn’t impose affiliate taxes. That doesn’t mean pretending to move and hope you don’t get caught.
A final few things to note.
1. This is not an attack on Jerry West. He’s got a good rep for delivering for StomperNet.
2. Virtual offices (and executive suites) do provide Internet marketers with valuable services. Just don’t use them for unethical or illegal purposes.
3. Yes, these affiliate taxes are a raw deal and the politicians who voted for them should be tarred and feathered. But railing against the unfairness of the taxes won’t solve anything. Take legal (hint: see a qualified Internet business lawyer) appropriate action to protect your business and then vote for your financial self-interest in the next election.
07/18/09 Update: Jerry West has subsequently revised his content to respond to this post. Of course, he does some gratuitous lawyer-bashing because he’s ticked off for being called out for giving bad advice to his fanboys/sheeple.